Volume 5, Issue 1 -

This paper analyses how accounting frameworks can affect three important areas of responsibility of many central banks, namely monetary policy, financial stability and banking supervision. The identified effects of accounting rules and accounting information on the activities of a central bank are manifold. First, the effectiveness of monetary policy crucially hinges on the financial independence of a central bank, which can be evidenced, inter alia, by its financial strength. Using a new simulation of the financial results of the European Central Bank (ECB), this paper shows that the reported annual profit and financial buffers of a central bank can be significantly affected by accounting, profit distribution and loss coverage rules. Second, in respect of financial stability, the accounting frameworks applied by commercial banks can not only affect their behaviour, but also that of financial markets. Indeed, there is evidence that accounting frameworks amplified pro-cyclicality during the recent crisis, and thus posed risks to the stability of the financial system. This being so, the accounting frameworks of credit institutions have obvious implications for central banks’ analyses with regard to promoting financial stability. Finally, as regards banking supervision, regulatory reporting and key supervisory ratios are based on accounting data. Under the new regulatory framework for banks in the European Union (EU), bank supervisors are highly reliant on accounting data. This means that central banks, in their role as bank supervisors, need to understand the underlying accounting rules and should directly support the development and application of harmonised accounting frameworks.

A stock exchange is a place to list and trade stocks. Many Anglo-American exchanges have seen a dramatic transformation from mutual membership organizations to for-profit and even self-listed corporations. In contrast, China’s exchanges still maintain the “strange” characteristic – they are a hybrid body of membership and bureaucracy. Their distinctions can be explained through the market-induced approach and authority-imposed approach. The advent of Anglo-American exchanges is mainly induced by market players, while their compelling transformations are jointly driven by market players and pro-competition authorities. However, the creation, formulation and evolution of China’s exchanges are imposed firstly by local authorities for institutional control and then by central authorities for institutional control. Although the growing market factors have been to some extent considered by Chinese authorities over the last few years, there is little possibility that market forces will fundamentally change the structure of China’s exchanges. The exchanges will be continuously dominated and controlled by authorities, so the same institutional transformations as Anglo-American exchanges will not occur in China in the foreseeable future.

This note offers two short comments on Kai Lyu’s paper published by AEL: A Convivium in 2015. The note highlights the fact that although the historical comparative perspective is very fruitful, Kai Lyu could have gone beyond the market/state divide, and could have better integrated the roles of stock exchanges in the political economy of China and the US in order to account for their different institutional transformations.

This is a reply to Ortiz, Horacio’s article: A Comment on “The Institutional Transformation of China’s Stock Exchanges: A Comparative Perspective” by Kay Lyu.